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California Lawmakers in Deal to Curb Pensions, Brown Says

California lawmakers and Governor Jerry Brown reached a last-minute deal to curtail public- employee pension costs in what may be the broadest overhaul to the benefits in more than a decade.

The accord calls for new workers to cover half of the cost of their benefits and seeks the same savings from current workers, through bargaining with unions, Brown said. It calls for a first-time cap on payouts for most new workers and a raise in the age at which they can retire. It also would crack down on abuses such as pension spiking and double dipping.

Brown, a Democrat, wants to cut pension benefits and curb the abuses before he asks voters in November to increase income and sales taxes. A weak recovery from the longest recession since the 1930s reduced job prospects and retirement benefits for most nongovernment workers, churning up a backlash against the pay and benefits of public employees nationwide.

“This is a major step,” Brown, 74, told reporters in Los Angeles today. “It took moving heaven and earth to get this far. Is the end of the story? No.”

Democrats who control the state Legislature have set a vote on the package for Aug. 31, the two-year session’s last day.

Capping Payments

Retirement payments to most new workers would be based on wages capped at about $110,000 a year, or $132,000 for those not covered by the federal Social Security system. The proposal also increases the minimum retirement age by at least two years for all new public employees and reduces the basis for calculating pension benefits.

“It’s important to note that employees are making sacrifices,” Brown said. “It’s not easy. We’ve had to make some cutbacks.”

The agreement also takes aim at abusive practices, barring pension spiking, where a future retirement payments are inflated by manipulating overtime, unused vacation and special compensation. It also would limit double dipping, when a retiree collecting benefits takes another government job. And it would ban workers from buying service credit to boost their payouts.

“We’re outraged that a Democratic governor and Democratic Legislature are taking a wrecking ball to retirement security for teachers, firefighters, school employees, and police officers,” said Dave Low, chairman of Californians for Retirement Security. The group represents 1.5 million public workers.

Republican Support

Asked about union opposition, Brown said he “hopes” it doesn’t doom the deal. He said that many Republican lawmakers expressed support for elements of his proposal, so some may support the agreement he reached with legislative Democrats.

“It’s hard to get reductions,” Brown said. “Nobody likes to go backwards. Nobody likes to sacrifice.”

The agreement omits Brown’s proposal to create a new type of pension, combining elements of a 401(k) savings plan common among nongovernment employers with conventional defined-benefit systems that guarantee payments for life. Such a plan would have spread to workers some of the market risk now borne by taxpayers, who must make up for pension-investment shortfalls.

Brown is relying on labor support for his proposal on the November ballot to temporarily boost the state sales tax, already the highest in the U.S., to 7.5 percent from 7.25 percent. He also wants to increase rates on income starting at $250,000, with those making $1 million or more, now taxed at 10.3 percent, raised to 13.3 percent, the most of any state.

Tax Strategy

Brown and Democrats are counting on the tax increase to provide $5.6 billion to the state budget for the fiscal year that began July 1. If voters reject the measure, $6.1 billion will be automatically cut from state spending -- $5.5 billion coming from schools, enough to pay for 15 days of classes.

“If voters think that legislators have made a serious policy change, then the chances for the tax increase improve,” Jack Pitney, who teaches politics at Claremont McKenna College in Claremont, California, said yesterday. “But if they think it is nothing but window dressing, then chances get a lot worse.”

The California Public Employees’ Retirement System, the largest pension in the U.S. with $239.6 billion of assets, has called a special meeting tomorrow and the next day to discuss the package and detail how much it could curb taxpayer costs. The system has about 1.6 million beneficiaries.

Rising retiree obligations are straining the budgets of states such as California and cities across the U.S. still grappling with income- and sales-tax revenue slammed by the recession, which ended more than three years ago.

California’s state pensions in 2010 had about 81 percent of what they needed to cover the benefits they promised, down from 87 percent in the previous year, according to an annual study by Bloomberg Rankings. The median for all states was 75 percent, the data show.

“I think this puts the lie to those critics who say we’re not working to fix California’s problems,” Brown said. “We’ve lived beyond our means and the chickens are coming home to roost.”

To contact the reporters on this story: Michael B. Marois in Sacramento at mmarois@bloomberg.net James Nash in Los Angeles at jnash24@bloomberg.net

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net

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